HSBC economists Tuesday predicted that China would make a moderate interest rate hike in 2005 but the renminbi (RMB) exchange rate should remain stable.

The central bank of China may further adjust the benchmark interest rate in the first half of this year as inflationary pressure remains, said Qu Hongbin, Senior Economist of Greater China at HSBC, Tuesday at a press conference in Beijing. He predicted the rate rise to stand at 0.27 percentage points.

In spite of the tight controls on credit supply, China's fixed asset investment is maintaining momentum, so the pressure of higher raw materials prices remains, he said.

Moreover, as the US Federal Reserve is expected to further raise the US dollar interest rate this year, it is also creating an environment pushing for an interest rate increase for the RMB, he said.

Qu also predicted that China's consumer price index, the barometer for inflation, would rise about 4 percent in 2005, which echoes the latest prediction by economists with the National Bureau of Statistics and should be roughly the same as the figure in 2004.

The overall Chinese economy will land softly in 2005, said Qu.

HSBC predicted China's gross domestic product growth to slow down from around 9 percent in 2004 to somewhere around 7 percent in 2005 and 2006.

Other foreign institutions, including Standard & Poor's equity research, have put the 2005 figure at around 8 percent, which is closer to the official target.

Fixed asset investment, a main driver of the economy, however, has stirred more concerns over excessive growth.

The sector expanded rapidly in the second half of 2003 and first few months of 2004, triggering the authorities to tighten credit supply to over-invested sectors, which helped ease investment growth.

The latest statistics pointed to an increase of 28.9 percent in urban fixed asset investment in the first eleven months of 2004 year-on-year.

But opinions are split on whether the investment sector is over-restricted or whether more curbs should be exerted to avoid a rebound of excessive growth.

Qu predicted that the investment sector will decline sharply in terms of growth in 2005 as the economic cooling measures take further effect.

The focus for the government is to change the growth model of the economy and adjust the direction of investment, he said.

As for exchange rate reform, which has drawn much public attention over the past year, market speculation for a reevaluation of the RMB is losing strength.

"I think the RMB will remain stable against the US dollar through this year," said Stephen King, Group Chief Economist and Global Head of Economics and Strategy Research of HSBC, yesterday.

Though there have been suggestions from overseas that China should speedily reevaluate its currency to cool down economic overheating and reduce the trade surplus to countries like the United States, such an argument is weak, said King.

China is not the cause of external imbalances, he said.

Though its trade surplus with the United States is large, China also has, at the same time, a growing trade deficit with other Asian countries.

Moreover, the huge US trade deficit has to be resolved through other means, like stronger demand from other markets and weaker domestic demand, not by a reevaluation of the RMB.

China's financial authority has repeatedly reaffirmed its stance on the exchange rate scheme over the past year, saying the RMB exchange rate will be kept fundamentally stable at an appropriate and balanced level and measures will be taken to improve the RMB exchange rate formation system.

China's pegged exchange rate with the US dollar has served it well over the past decade, said King.

"If China changes its regime, it should do so when conditions suit China, not simply to placate foreign critics," he wrote in a recent report.

(China Daily January 12, 2005)